Five ‘Below Book’ Stocks Look Ready to Rebound: John Dorfman

April 25 (Bloomberg) -- A time-honored method of detecting
cheap stocks is to look for ones that sell below book value.

Book value is a company’s net worth, or assets minus
liabilities. Divide total book value by the number of shares
outstanding, and you get the company’s book value per share,
often called simply “book.” About 6 percent of U.S. stocks now
trade below book.

Some of these companies are going nowhere. They are cheap
for good reason, illustrating the old joke, “Things are always
darkest just before they go completely black.”

Others are inexpensive because they are working through
problems that probably are temporary. I have selected five that
I think have good potential to rebound from whatever is
troubling them, and to notch good capital gains over the next
year or two.

One is BlackRock Inc., the world’s largest asset manager.
Public since 1999, the New York-based company acquired State
Street Research in 2005, absorbed Merrill Lynch Investment
Management in 2006, and merged with Barclays Global Investors in
2009. It now manages more than $3 trillion. Last year it pulled
in more than $8 billion in revenue.

BlackRock trades right at book value, and for 17 times
earnings. In the past five years -- a difficult period for
financial companies -- earnings have grown at almost a 20
percent annual clip.

BlackRock’s Performance

In the five years through March, it has provided investors
with a cumulative total return (including reinvested dividends)
of 57 percent. Contrast that with about 6 percent for Goldman
Sachs Group Inc., and a loss of 65 percent for Bank of America
Corp.

Some people insist on looking only at tangible book value
per share, which excludes items such as the value of patents,
brand names, and goodwill, or the bookkeeping entry that
represents the premium one company paid to buy another. They
wouldn’t like BlackRock. Its tangible book value is negative, as
it has lots of goodwill on its books from acquisitions.

My other four picks are much smaller than BlackRock.

OM Group Inc. is a producer of cobalt and metals-based
powders and specialty chemicals that I sold during the recession
and bear market of 2007-2009 because its revenue and earnings
were dropping precipitously. Now, I see signs that operations
are recovering. The Cleveland-based company has turned a profit
six quarters in a row. Though earnings are far from the record
levels of early 2008, the latest quarter was the best
performance in more than two years.

One ‘Buy’

The stock is obscure. Only four analysts from lesser-known
brokerage houses cover it, according to data compiled by
Bloomberg; only one rates it a “buy.”

This is the sort of situation that often gets my greed
glands going: a little-followed stock, disdained by those few
who know about it, selling cheaply, with improving earnings.

Speedway Motorsports Inc., based in Concord, North
Carolina, owns and operates eight auto-racing tracks in eight
states -- California, Georgia, Kentucky, Nevada, New Hampshire,
North Carolina, Tennessee and Texas.

I recommended this stock in January 2010 and it has
returned about a negative 10 percent since then. But I think it
is likely to rev up as the economy revives, particularly in the
South, where auto racing is most popular.

E.W. Scripps Co. is a recommendation I make with my heart
in my throat. My ventures into newspaper stocks in recent years
-- notably with New York Times Co. and Gannett Co. -- have been
unprofitable. Rising paper costs and Internet competition have
punished the industry.

Newspaper Man

What’s more, I know I am not objective. I spent 27 years as
a journalist for various papers and magazines (including Forbes
and the Wall Street Journal) before becoming a money manager in
1997. I’m still fond of the nation’s rags.

All that said, Scripps strikes me as a likely gainer in the
next year or two. The Cincinnati-based company owns 14
newspapers (including the Commercial Appeal in Memphis,
Tennessee) and 10 television stations (among them, WPTV in West
Palm Beach, Florida, which the company says is the state’s
highest-rated broadcaster).

The pulse of newspapers and TV stations is advertising, and
I believe ad spending is likely to increase in 2011 and 2012 as
the economy gains steam. Internet-based advertising is gaining
market share, but it isn’t the whole ball game, nor will it
become so.

Insurance Buy

Most stocks selling for less than book are insurance
stocks. That’s partly because book value for insurers is boosted
by the reserves of cash and securities they hold to pay future
claims.

One insurance stock that looks good to me is Horace Mann
Educators Corp., a seller of property and casualty policies,
annuities and life insurance. The Springfield, Illinois-based
company has shown an annual profit since 1992 and earnings have
risen in six of the past eight years.

Horace Mann’s expense ratio (expenses divided by premiums)
is too high -- 41 percent last year. If the company doesn’t cut
costs, I think someone else will acquire it and do it for them.
In any case, at 0.8 times book value, 0.7 times revenue, and
under 10 times earnings, Horace Mann looks like a bargain to me.

Disclosure note: I have no long or short positions,
personally or for clients, in the stocks discussed in this
week’s column.

(John Dorfman, chairman of Thunderstorm Capital in Boston,
is a columnist for Bloomberg News. The opinions expressed are
his own. His firm or clients may own or trade securities
discussed in this column.)